The accompanying notes are an integral part of these
consolidated financial statements
Notes to the Consolidated Financial Statements
Note 1. Organization
Akoustis Technologies, Inc. (formerly known as
Danlax, Corp.) (“the Company”) was incorporated under the laws of the State of Nevada, U.S. on April 10, 2013. Effective
December 15, 2016, the Company changed its state of incorporation from the State of Nevada to the State of Delaware. Through its
subsidiaries, Akoustis, Inc. and Akoustis Manufacturing New York, Inc. (each a Delaware corporation), the Company, headquartered
in Huntersville, North Carolina, is focused on developing, designing and manufacturing innovative radio frequency filter products
for the mobile wireless device industry. The mission of the Company is to commercialize and manufacture its patented BulkONE
®
acoustic wave technology to address the critical frequency-selectivity requirements in today’s mobile smartphones -
improving the efficiency and signal quality of mobile wireless devices and enabling the Internet of Things.
On August 11, 2016, the Company changed its fiscal
year from the period beginning on April 1 and ending on March 31 of each year to the period beginning on July 1 and ending on June
30 of each year, effective for the fiscal year ended June 30, 2017.
On March 10, 2017, the Company announced that its
common stock was approved for listing on the NASDAQ Capital Market, effective March 13, 2017, under the symbol AKTS.
Acquisition of Assets
On June 26, 2017, pursuant to a Definitive Asset Purchase Agreement and Definitive Real Property Purchase
Agreement (collectively, the “Agreements”) with The Research Foundation for the State University of New York (“RF-SUNY”)
and Fuller Road Management Corporation (“FRMC”), an affiliate of RF-SUNY, respectively, the Company completed the acquisition
of certain specified assets, including STC-MEMS, a semiconductor wafer-manufacturing operation and microelectromechanical systems
(“MEMS”) business with associated wafer-manufacturing tools, as well as the real estate and improvements associated
with the facility located in Canandaigua, New York, which is used in the operation of STC-MEMS (the assets and real estate and
improvements referred to together herein as the “STC-MEMS Business”),
which
was created in 2010 by RF-SUNY as an economic development project. The purpose of the initiative was to explore different technology
opportunities with the goal of being a vertically integrated provider of foundry services that would offer its customers the capacity,
infrastructure and operational capabilities of semiconductor and advanced manufacturing for aerospace, biomedical, communications,
defense, and energy markets. Post-acquisition date, the Company also agreed to assume substantially all the on-going obligations
of STC incurred in the ordinary course of business including with respect to the 29 employees employed by RF-SUNY
.
The
Company acquired the STC-MEMS Business through its wholly-owned subsidiary, Akoustis Manufacturing New York, Inc., (“Akoustis
NY”), a Delaware corporation.
See Note 4 for a
detailed description of the transaction.
The 2016-2017 Offering
The Company sold a total of 2,142,000 shares of
its common stock, par value $0.001 per share (the “Common Stock”) in a private placement offering (the “2016-2017
Offering”) at a fixed purchase price of $5.00 per share (the “2016-2017 Offering Price”), with closings in each
of November and December 2016 and January and February 2017. The Company also sold a total of 663,000 shares of Common Stock in
a private placement offering (the “2017 Offering” and together with the 2016-2017 Offering, the “Offerings”)
at a fixed purchase price of $9.00 per share (the “2017 Offering Price”), with closings in May 2017. Aggregate gross
proceeds from the Offerings totaled $16.7 million before deducting commissions and expenses of approximately $1.3 million. In connection
with the 2016-2017 Offering, the Company also issued to the placement agents warrants to purchase an aggregate 205,126 shares of
Common Stock with a term of five years and an exercise price of $5.00 per share, and in connection with the 2017 Offering, the
Company issued to the placement agents warrants to purchase an aggregate 46,410 shares of Common Stock with a term of five years
and an exercise price of $9.00 per share. In accordance with the terms of the subscription agreements executed by the Company and
each of the investors, if the Company issues additional shares of Common Stock or Common Stock equivalents (subject to customary
exceptions, including but not limited to issuances of awards under Company employee stock incentive programs and certain issuances
in connection with credit arrangements, equipment financings, lease arrangements, or similar transactions) between November 25,
2016 and September 4, 2017 (with respect to the 2016-2017 Offering), or between May 1, 2017 and May 1, 2019 (with respect to the
2017 Offering), for a consideration per share less than the 2016-2017 Offering Price or the 2017 Offering Price, as applicable
(as adjusted for any subsequent stock dividend, stock split, distribution, recapitalization, reclassification, reorganization,
or similar event) (the “Lower Price”), each investor will be entitled to receive from the Company additional shares
of Common Stock in an amount such that, when added to the number of shares of Common Stock initially purchased by such investor,
will equal the number of shares of Common Stock that such Investor’s investment in the applicable offering would have purchased
at the Lower Price.
The March 2016 and April 2016 Offerings
On March 10, 2016, the Company held a closing of
a private placement offering (the “March 2016 Offering”) in which it sold 494,125 shares of Common Stock at a fixed
purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $790,600 (before deducting
legal expenses of $20,913 for the March 2016 Offering).
On April 14, 2016, the Company held closings of
a private placement offering (the “April 2016 Offering”) in which the Company sold 1,741,185 shares of Common Stock
at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for aggregate gross proceeds of $2,785,896
(before deducting expenses of $223,000 for legal services and agent commissions of the April 2016 Offering).
Investors in the shares were given anti-dilution
protection with respect to the shares of Common Stock sold in the April 2016 Offering such that if, during the period from the
closing of the April 2016 Offering until 90 days after the date on which the registration statement that the Company is required
to file under a Registration Rights Agreement with the investors is declared effective by the SEC, the Company shall issue
additional shares of Common Stock or Common Stock equivalents (subject to customary exceptions, including but not limited to issuances
of awards under the Company’s 2015 Equity Incentive Plan and certain issuances of securities in connection with credit arrangements,
equipment financings, lease arrangements or similar transactions) for a consideration per share less than the 2016 Offering Price
(as adjusted for any subsequent stock dividend, stock split, distribution, recapitalization, reclassification, reorganization
or similar event) (the “2016 Lower Price”), each such investor will be entitled to receive from the Company additional
shares of Common Stock in an amount such that, when added to the number of shares of Common Stock initially purchased by such
investor, will equal the number of shares of Common Stock that such investor’s Offering subscription amount would have purchased
at the 2016 Lower Price. As of mid-October 2016, the anti-dilution rights expired.
In connection with the April 2016 Offering, the Company agreed to pay the placement
agents a cash commission of 8% of the gross proceeds raised from investors first contacted by the placement agents in the 2016
Offering. In addition, the placement agents received warrants to purchase a number of shares of Common Stock equal to 10% of the
number of shares of Common Stock sold in the April 2016 Offering, with a term of five (5) years and an exercise price of $1.60
per share (the “2016 Placement Agent Warrants”). Any sub-agent of the placement agents that introduced investors to
the 2016 April Offering was entitled to share in the cash fees and warrants attributable to those investors as described above.
Note 2. Going Concern and Management Plans
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course
of business. As of June 30, 2017, the Company had working capital of $8.7 million and an accumulated deficit of $15.8 million.
Since inception, the Company has recorded approximately $892,000 of revenue from contract research and government grants. As of
June 30, 2017, the Company had cash and cash equivalents of $9.6 million which the Company believes is sufficient to fund its
current operations through December 2017. As a result, we will need to obtain additional capital through the sale of additional
equity securities, debt and additional grants, or otherwise, to fund operations past that date. The Company is actively managing
and controlling the Company’s cash outflows to mitigate these risks, these matters raise substantial doubt about the Company’s
ability to continue as a going concern.
The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company had $6.7 million
of cash and cash equivalents on hand as of September 8, 2017 to fund its business.
There is no assurance that the Company’s
projections and estimates are accurate. The Company’s primary sources of funds for operations since inception have been private
equity, note financings and grants. The Company needs to obtain additional capital to accomplish its business plan objectives and
will continue its efforts to secure additional funds through issuance of debt or equity instruments and/or receipts of grants as
appropriate. However, the amount of funds raised, if any, may not be sufficient to enable the Company to attain profitable operations.
To the extent that the Company is unsuccessful in obtaining additional financing, the Company may need to curtail or cease its
operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support
further operations. There can be no assurance that such a plan will be successful.
Note 3. Summary of significant accounting policies
Basis of presentation
The Company’s consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Akoustis, Inc. and Akoustis Manufacturing New York, Inc.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates and assumptions
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues
and expenses during the reporting period(s).
Critical accounting estimates are estimates for
which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or
operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements
were:
|
(1)
|
Fair value of long–lived assets:
Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under–performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
|
|
(2)
|
Valuation allowance for deferred tax assets:
Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the NOL carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company’s incurrence of losses, (b) general economic conditions, and (c) other factors.
|
|
(3)
|
Estimates and assumptions used in valuation of equity instruments:
Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk-free rate(s) to value share options and similar instruments.
|
|
(4)
|
Estimates and assumptions used in valuation of derivative liability
:
Management utilizes a binomial option pricing model to estimate the fair value of derivative liabilities. The model includes subjective assumptions that can materially affect the fair value estimates.
|
|
(5)
|
Estimates and assumptions used in business combinations
:
The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets and liabilities acquired. The fair value measurement is highly sensitive to significant changes in the unobservable inputs and significant increases (decreases) in discount rate or decreases (increases) in price/earnings multiples would result in a significantly lower (higher) fair value measurement. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the acquired assets.
|
These significant accounting estimates or assumptions
bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates
or assumptions are difficult to measure or value.
Management bases its estimates on various assumptions
that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash equivalents. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions
insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent
balances may be uninsured or in amounts that exceed the FDIC insurance limits; as of June 30, 2017 approximately $9.4 million
was uninsured.
Inventory
Inventory is stated at the lower of cost or market
using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following at June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Finished goods held for resale
|
|
$
|
49,374
|
|
|
$
|
43,544
|
|
Raw materials
|
|
|
139,102
|
|
|
|
—
|
|
|
|
$
|
188,476
|
|
|
$
|
43,544
|
|
Property and equipment, net
Property and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated using the straight–line method on the various asset classes over their
estimated useful lives, which range from three to ten years. Expenditures for major renewals and betterments that extend
the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs, which do not extend
the economic useful life of the related assets, are charged to operations as incurred.
Intangible assets, net
Intangible assets consist of patents and trademarks.
Applicable long–lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated
period that the assets will generate revenue, or the statutory or contractual term in the case of patents. Estimates of useful
lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s
judgment. Patents are amortized on the straight-line method over their useful lives of 15 years.
Impairment of Long-Lived Assets
The Company assesses the recoverability of its
long-lived assets, including property and equipment, when there are indications that the assets might be impaired. When evaluating
assets for potential impairment, the Company compares the carrying value of the asset to its estimated undiscounted future cash
flows. If an asset’s carrying value exceeds such estimated undiscounted cash flows, the Company records an impairment
charge for the difference between the carrying amount of the asset and its fair value.
Based on its assessments, the Company did not record
any impairment charges for the years ended June 30, 2017 and 2016.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and accounts payable approximate fair value due to the
short-term nature of these instruments.
The Company measures the fair value of financial
assets and liabilities based on the guidance of ASC 820, “
Fair Value Measurements and Disclosures
,” which defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
Fair value measurements are categorized using a
valuation hierarchy for disclosure of the inputs used to measure fair value, which prioritize the inputs into three broad levels:
Level 1 - Quoted prices are available in active
markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset
or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted
prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date, and include
those financial instruments that are valued using models or other valuation methodologies.
Level 3 - Pricing inputs include significant inputs
that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that
result in management’s best estimate of fair value.
Derivative Liability
The Company evaluates its options,
warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards
Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each
balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated statement
of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument
is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to
equity.
In circumstances where the embedded conversion
option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the
convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single,
compound derivative instrument.
The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity
instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the
fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance
sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12
months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB
Accounting Standards Codification (“Section 815-40-15”)
to determine whether an instrument (or an embedded
feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing
model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet
date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements
of operations.
Revenue Recognition
Change in Accounting Policy for Revenue Recognition
Effective October 1, 2016, the Company changed
its accounting policy for the recognition of grant revenue. The Company believes this change in accounting policy is preferable
due to the fact that grant revenue is viewed as an ongoing function of its intended operations. This change in accounting policy
also enhances the comparability of the Company’s financial statements with many of its industry peers. The adoption of this
accounting policy change has been applied retrospectively to all prior periods presented in this Annual Report on Form 10-K and
has had no impact on net loss per share.
Contract Research and Government Grants
The Company may generate revenue from product sales,
license agreements, collaborative research and development arrangements, and government grants. To date the Company’s principal
source of revenue consists of government research grants. The Company recognizes nonrefundable grant revenue when it is received
and reports this revenue as “Contract research and government grants” on the condensed consolidated statements of operations. Contracts
executed and monies received prior to the recognition of revenue are recorded as deferred revenue.
Engineering Review Services
The Company records Engineering Review Services
revenue (“ERS”) which is for providing one time design and development services whereby the Company’s R&D
personnel deliver simulations/models and demonstration units (low volume) for evaluation by the customers. The Company recognizes
revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the amount of fees
to be paid by the customer is fixed or determinable, and the collection of fees is reasonably assured. Total ERS revenue to date
is approximately $14,500.
Revenue Recognition for Facility Rental Income
Effective June 26, 2017, the Company records rental income for the tenants at the Company’s NY fabrication
facility. The Company recognizes rental income in the period the rental services are delivered to the lessee; rent is received
on a monthly, straight-line basis.
Research and Development
Research and development expenses are charged to
operations as incurred.
Equity–based compensation
The Company recognizes compensation expense for
all equity–based payments in accordance with ASC 718 “
Compensation – Stock Compensation
”. Under fair
value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes
compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted stock awards are granted at the discretion of the Company. These awards are restricted as to
the transfer of ownership and generally vest over the requisite service periods, typically over a four-year
period
(generally vesting either ratably over the first four years or on a tier basis of 50% on the second anniversary of the effective
date and 25% on the third and fourth anniversary dates). The fair value of a stock award is equal to the fair market value of a
share of Company stock on the grant date.
The fair value of an option award is estimated
on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires
the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is benchmarked against similar companies in a similar industry over the expected
option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free
rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends
on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The expected forfeiture
rate is estimated based on management’s best estimate.
Determining the appropriate fair value model and
calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above.
The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates,
which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the
Company uses different assumptions, equity–based compensation could be materially different in the future. In addition, the
Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If the
Company’s actual forfeiture rate is materially different from its estimate, the equity–based compensation could be
significantly different from what the Company has recorded in the current period.
The Company accounts for share–based payments
granted to non–employees in accordance with ASC 505-40, “
Equity Based Payments to Non–Employees
”.
The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments
issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date
at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the
counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over
the requisite service period.
Income taxes
The Company applies the elements of ASC 740–10
“
Income Taxes
” regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty
in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the taxing authority. As of March 31, 2017, no liability
for unrecognized tax benefits was required to be reported. The Company does not expect that the amount of unrecognized tax benefits
will significantly increase or decrease within the next twelve months. The Company’s policy is to recognize interest and
penalties related to tax matters in the income tax provision on the Statement of Operations. There was no interest and penalties
for the years ended June 30, 2017 and 2016.
Deferred taxes are computed based on the tax liability
or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between
financial and tax reporting purposes. The net difference, if any, between the provision for taxes and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities, if any, are classified as current and
non–current based on the classification of the related asset or liability for financial reporting purposes, or based on the
expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are recorded to reduce
deferred tax assets to that amount which is more likely than not to be realized.
Loss Per Share
Basic net loss per common share is computed by
dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period.
Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period,
adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the years
ended June 30, 2017 and 2016 presented in these consolidated financial statements, the weighted-average number of common shares
outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
The Company had the following common stock equivalents
at June 30, 2017 and 2016:
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Options
|
|
|
|
160,000
|
|
|
|
160,000
|
|
Warrants
|
|
|
|
612,165
|
|
|
|
471,697
|
|
Totals
|
|
|
|
772,165
|
|
|
|
631,697
|
|
Shares Outstanding
Shares outstanding include shares of restricted
stock with respect to which restrictions have not lapsed. Restricted stock included in reportable shares outstanding was 1,646,965
shares and 1,361,055 shares as of June 30, 2017 and 2016, respectively. Shares of restricted stock are included in the calculation
of weighted average shares outstanding.
Reclassification
Certain prior period amounts have been reclassified
to conform to current period presentation. The reclassifications did not have an impact on net loss as previously reported
.
Recently Issued Accounting Pronouncements
In July 2015, the Financial
Accounting Standards Board (FASB) issued the FASB Accounting Standards Update (ASU) No. 2015-11 “
Inventory (Topic 330)
:
Simplifying
the Measurement of Inventory” (“ASU 2015-11”).
The amendments in this Update do not apply to inventory
that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory,
which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory
within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent
measurement is unchanged for inventory measured using LIFO or the retail inventory method.
For public business entities,
the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. The Company is currently evaluating the effects of ASU 2015-11 on the consolidated financial statements.
In November 2015, the
FASB issued ASU No. 2015-17, “
Balance Sheet Classification of Deferred Taxes”,
which will require
entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies
the current guidance, which requires entities to separately present deferred tax assets and deferred tax liabilities as current
and noncurrent in a classified balance sheet. The ASU may be applied either prospectively or retrospectively. The amendments in
this ASU are effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual
periods. Earlier application is permitted as of the beginning of an interim or annual period. The Company is currently evaluating
the effects of ASU 2015-17 on the consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “
Financial
Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
.
The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public
business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted only for certain portions of the ASU related to financial liabilities.
The Company is currently evaluating the impact of the provisions of this new standard on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
“
Leases
”
(Topic 842)
. The FASB issued this update to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those
fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In April 2016, the FASB issued ASU No. 2016-09,
“
Compensation – Stock Compensation” (Topic 718)
. The FASB issued this update to improve the accounting
for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several
aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b)
classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance
is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In April 2016, the FASB issued ASU No. 2016-10,
“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)”.
In March
2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting
Revenue Gross verses Net) (Topic 606)”. These amendments provide additional clarification and implementation guidance on
the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying
guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling
costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s
intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an
entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control
principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption
of ASU 2014-09, which the Company intends to adopt for interim and annual reporting periods beginning after December 15, 2017.
The Company is in the process of evaluating the standard and does not expect the adoption will have a material effect on its consolidated
financial statements and disclosures.
In May 2016, the FASB issued ASU No. 2016-12,
“Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”,
which narrowly amended
the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and
is effective during the same period as ASU 2014-09. The Company is currently evaluating the standard and does not expect the adoption
will have a material effect on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, “
Classification of Certain Cash Receipts
and Cash Payments”
. This update provides guidance on how to record eight specific cash flow issues. This update is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted
and a retrospective transition method to each period should be presented. The Company is currently evaluating the effect of this
update on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”
, requiring that the statement of cash flows explain the change in the
total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance
is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted.
The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for
all periods presented. The Company is currently evaluating the impact of the new standard.
In May 2017, the FASB issued ASU 2017-09, “
Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance about which changes to the terms
or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is
required to be adopted in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on
its consolidated financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11, “
Earnings
Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting
for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”
.
Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round
features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced
on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that
issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement
of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing
Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This
pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments
of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update
do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2018. The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related
disclosures.
Note 4. Acquisition of STC-MEMS
Acquisition of STC-MEMS
On March 23, 2017, the Company entered into the Agreements with
RF-SUNY,
a New York State education corporation, on behalf of The State University of New York Polytechnic Institute, and FRMC, an affiliate
of RF-SUNY to acquire the STC-MEMS Business. The acquisition will allow the Company to internalize manufacturing, increase capacity
and control its wafer supply chain for single crystal BAW RF filters. Akoustis will utilize the NY Facility to consolidate all
aspects of wafer manufacturing for its high-band RF filters.
Smart Systems Technology & Commercialization
Center (STC-MEMS) was created in 2010 to form a vertically integrated “one-stop-shop” in smart system and smart-device
innovation and manufacturing. The facility was designed to provide its customers the capacity, infrastructure and operational capabilities
in all areas of semiconductor and advanced manufacturing, while covering a diverse number of markets including aerospace, biomedical,
communications, defense, and energy. Located in Canandaigua, New York, just outside of Rochester, the STC-MEMS facility includes
certified cleanroom manufacturing, advanced test and metrology, as well as a MEMS and optoelectronic packaging facility.
The Company acquired the STC-MEMS Business
through its Akoustis NY, a Delaware corporation. Post-acquisition date, the Company also agreed to assume substantially all the
on-going obligations of the STC-MEMS Business incurred in the ordinary course of business, including with respect to the 29 employees
employed by RF-SUNY. The purchase closed on June 26, 2017.
Acquisition Price
The purchase price paid for the transaction
was an aggregate of approximately $4.58 million consisting of (i) $2.75 million in cash consideration, (ii) $96,000 in inventory,
and (iii) a contingent real estate liability of approximately $1.73 million.
Recognizing and measuring the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree
The fair value of the purchase consideration
issued to the sellers of the STC-MEMS Business was allocated to the net tangible and intangible assets acquired. The Company accounted
for the STC-MEMS Business acquisition as the purchase of a business under GAAP under the acquisition method of accounting, as specified
in ASC 805 “Business Combinations”, and the assets and liabilities acquired were recorded as of the acquisition date,
at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately
$6.3 million. The excess of the aggregate fair value of the net tangible and intangible assets over the consideration paid has
been treated as a gain on bargain purchase in accordance with ASC 805. The purchase price allocation was based, in part, on management’s
knowledge of the STC-MEMS Business and the results of a third-party appraisal commissioned by management.
The Company utilized the services of an
independent appraisal company to assist it in assessing the fair value of the assets and liabilities acquired. This assessment
included an evaluation of the fair value of the real estate and fixed assets in addition to the intangibles acquired. The real
estate was valued utilizing a combination of the income and cost approaches. The fixed assets were valued utilizing a combination
of the market and cost approaches. The intangible asset, customer relationships, was valued utilizing the income approach.
The valuation process also included discussion with management regarding the history and business operations of the STC-MEMS Business,
a study of the economic and industry conditions in which the STC-MEMS Business competes and an analysis of the historical and
projected financial statements and other records and documents.
Recognizing and measuring goodwill or a gain
from a bargain purchase
Management reviewed the assets and liabilities acquired and the assumptions utilized in estimating their
fair values. Further revisions to the estimates were not deemed necessary and after identifying and valuing all assets and liabilities
of the STC-MEMS Business, the Company concluded that recording a bargain purchase gain was appropriate and required under GAAP.
Purchase Consideration
|
|
|
|
|
|
|
|
Amount of consideration:
|
|
$
|
4,576,591
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at fair value
|
|
|
|
|
Land
|
|
$
|
1,000,000
|
|
Building
|
|
|
3,000,000
|
|
STC-MEMS equipment
|
|
|
2,124,650
|
|
Inventory
|
|
|
96,049
|
|
Customer relationships
|
|
|
81,773
|
|
Net assets acquired
|
|
$
|
6,302,472
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
6,302,472
|
|
Consideration paid
|
|
|
4,576,591
|
|
Gain on bargain purchase
|
|
$
|
1,725,881
|
|
Prior to this transaction, none of the parties
negotiating on behalf of the Company had met any of the individuals negotiating on behalf of the sellers. Further, there were no
agreements signed with any individuals negotiating this deal. Additionally, there were no related parties associated with this
transaction.
The following presents the unaudited pro-forma
combined results of operations of the Company with the STC-MEMS Business as if the entities were combined on July 1, 2015.
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues, net
|
|
$
|
4,195,374
|
|
|
$
|
5,314,499
|
|
Net (loss) allocable to common shareholders
|
|
$
|
(13,907,072
|
)
|
|
$
|
(7,613,100
|
)
|
Net (loss) per share
|
|
$
|
(0.82
|
)
|
|
$
|
(0.57
|
)
|
Weighted average number of shares outstanding
|
|
|
16,990,536
|
|
|
|
13,349,482
|
|
The unaudited pro-forma results of operations are
presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results
that would have been attained had the acquisitions been completed as of July 1, 2015 or to project potential operating results
as of any future date or for any future periods.
The estimated useful life remaining on equipment
and building acquired with the STC-MEMS Business is 3 to 5 years and 11 years, respectively.
The Company consolidated
Akoustis NY as of the closing date of the agreement, and the results of operations of the Company include that of Akoustis NY. The
Company recognized net revenues attributable to Akoustis NY of $0 and recognized net losses of $171,000 during the period June
26, 2017 through June 30, 2017; driven by wages and fringe benefits of $126,000.
Note
5. Property and equipment
Property
and equipment consisted of the following:
|
|
Estimated
Useful Life
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Land
|
|
n/a
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
Research and development equipment
|
|
3 – 10 years
|
|
|
1,851,427
|
|
|
|
226,372
|
|
Computer equipment
|
|
5 years
|
|
|
16,783
|
|
|
|
16,783
|
|
Furniture and fixtures
|
|
5 – 10 years
|
|
|
3,725
|
|
|
|
3,725
|
|
STC-MEMS equipment
|
|
3 – 5 years
|
|
|
2,124,650
|
|
|
|
—
|
|
Building
|
|
11 years
|
|
|
3,000,000
|
|
|
|
—
|
|
Leasehold improvements
|
|
*
|
|
|
3,240
|
|
|
|
3,240
|
|
|
|
|
|
|
7,999,825
|
|
|
|
250,120
|
|
Less: Accumulated depreciation
|
|
|
|
|
(146,011
|
)
|
|
|
(43,135
|
)
|
Total
|
|
|
|
$
|
7,853,814
|
|
|
$
|
206,985
|
|
(*)
Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
The
Company recorded depreciation expense of $102,876 and $34,828 for the years ended June 30, 2017 and 2016, respectively.
As
of June 30, 2017, research and development fixed assets totaling $1,062,496 were not placed in service and therefore not depreciated
during the period.
Note
6. Intangible assets
The
Company’s intangible assets consisted of the following:
|
|
Estimated
useful life
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Patents
|
|
|
15 years
|
|
|
$
|
135,291
|
|
|
$
|
74,562
|
|
Customer relationships
|
|
|
14 years
|
|
|
|
81,773
|
|
|
|
—
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(12,097
|
)
|
|
|
(4,889
|
)
|
Subtotal
|
|
|
|
|
|
|
204,967
|
|
|
|
69,673
|
|
Trademarks
|
|
|
—
|
|
|
|
1,560
|
|
|
|
1,560
|
|
Intangible assets, net
|
|
|
|
|
|
$
|
206,527
|
|
|
$
|
71,233
|
|
The
Company recorded amortization expense of $7,208 and $3,339 for the year ended June 30, 2017 and 2016, respectively.
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
June 30,
|
|
|
|
|
2018
|
|
|
$
|
14,811
|
|
2019
|
|
|
|
14,811
|
|
2020
|
|
|
|
14,811
|
|
2021
|
|
|
|
14,811
|
|
2022
|
|
|
|
14,811
|
|
Thereafter
|
|
|
|
130,912
|
|
Total
|
|
|
$
|
204,967
|
|
|
|
|
|
|
|
|
Note
7. Accounts payable and accrued expenses
Accounts
payable and accrued expenses consisted of the following at June 30, 2017 and June 30, 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Accounts payable
|
|
$
|
494,515
|
|
|
$
|
73,400
|
|
Accrued salaries and benefits
|
|
|
274,050
|
|
|
|
21,376
|
|
Accrued bonuses
|
|
|
—
|
|
|
|
126,575
|
|
Accrued stock-based compensation
|
|
|
399,157
|
|
|
|
179,079
|
|
Other accrued expenses
|
|
|
168,646
|
|
|
|
143,216
|
|
Totals
|
|
$
|
1,336,368
|
|
|
$
|
543,646
|
|
Note
8. Derivative Liabilities
Upon
closing of private placements on May 22, 2015 and June 9, 2015, the Company issued 298,551 and 26,099 warrants, respectively,
to purchase the same number of shares of Common Stock with an exercise price of $1.50 and a five-year term to the placement agent.
Upon closing of a private placement in April 2016, the Company issued 153,713 warrants to purchase the same number of shares of
Common Stock with an exercise price of $1.60 and a five-year term to the placement agent. The Company identified certain put features
embedded in the warrants that potentially could result in a net cash settlement, requiring the Company to classify the warrants
as a derivative liability.
During
the year ended June 30, 2017, the Company amended the existing warrant agreements to eliminate the derivative feature. Upon execution
of the revised agreements, a total of 471,697 warrants with a fair value of $2,200,219 were reclassified from liability to equity.
Level
3 Financial Liabilities – Derivative warrant liabilities
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance
sheet as of June 30, 2017:
|
|
Carrying
|
|
|
Fair Value Measurement Using
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
warrant liabilities
|
|
$
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the condensed consolidated
balance sheet as of June 30, 2016:
|
|
Carrying
|
|
|
Fair Value Measurement Using
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
warrant liabilities
|
|
$
|
1,322,729
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,322,729
|
|
|
$
|
1,322,729
|
|
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended
June 30, 2017 and 2016:
|
|
Fair Value
Measurement
Using Level 3
Inputs
|
|
|
|
Total
|
|
Balance, July 1, 2015
|
|
$
|
205,144
|
|
Issuance of derivative warrants
|
|
|
165,719
|
|
Change in fair value of derivative warrant liabilities
|
|
|
968,840
|
|
Reclassification of Derivative liability to Additional Paid in Capital
|
|
|
(16,974
|
)
|
Balance, June 30, 2016
|
|
$
|
1,322,729
|
|
Change in fair value of derivative warrant liabilities
|
|
|
877,490
|
|
Reclassification of Derivative liability to Additional Paid in Capital
|
|
|
(2,200,219
|
)
|
Balance, June 30, 2017
|
|
$
|
—
|
|
The
fair value of the derivative feature of the warrants on the issuance dates, at the balance sheet date and on the date of reclassification
to equity were calculated using a binomial option model valued with the following weighted average assumptions:
|
|
April 14,
2016
|
|
|
June 30,
2016
|
|
|
January 19,
2017
|
|
Risk free interest rate
|
|
|
1.04
|
%
|
|
|
1.08
|
%
|
|
|
1.01
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
41
|
%
|
|
|
44
|
%
|
|
|
39
|
%
|
Remaining term (years)
|
|
|
4.15 - 4.19
|
|
|
|
5.0
|
|
|
|
3.89 - 4.79
|
|
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring
dividends in the near future.
Volatility:
The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s
peer group stock price for a period consistent with the warrant’s expected term.
Remaining
term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.
During
the years ended June 30, 2017 and 2016, the Company marked the derivative feature of the warrants to fair value and recorded a
loss of $877,490 and $968,840, respectively, relating to the change in fair value.
Note
9. Concentrations
For the year ended June 30, 2017, one vendor represented 11% of the Company’s purchases. For the
year ended June 30, 2016, two vendors represented 28% and 14% of the Company’s purchases.
Note
10. Stockholders’ Equity
On
December 15, 2016, in connection with the Company’s reincorporation from the State of Nevada to the State of Delaware, the
Company filed a Certificate of Incorporation with the State of Delaware, which, among other things, reduced the number of authorized
shares of capital stock of the Company from 310,000,000 total shares consisting of (a) 300,000,000 shares of Common Stock and
(b) 10,000,000 of $0.001 par value “blank check” preferred stock to 50,000,000 total shares consisting of (a) 45,000,000
shares of Common Stock and (b) 5,000,000 shares of “blank check” preferred stock.
As
of June 30, 2017 and 2016, there were no shares of preferred stock issued and outstanding.
The
Company recorded stock-based compensation expense for the shares issued to consultants that have vested, which is a component
of operating expenses in the Consolidated Statement of Operations as follows:
|
|
|
|
|
Stock-Based
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Year Ended
|
|
Month
of Original Grant
|
|
Shares
Issued
|
|
|
June
30,
2017
|
|
|
June
30,
2016
|
|
December
2015
|
|
|
230,000
|
|
|
$
|
945,189
|
|
|
$
|
342,811
|
|
March
2016
|
|
|
60,000
|
|
|
|
261,214
|
|
|
|
71,786
|
|
August
2016
|
|
|
40,000
|
|
|
|
147,600
|
|
|
|
—
|
|
January
2017
|
|
|
50,000
|
|
|
|
194,776
|
|
|
|
—
|
|
|
|
|
380,000
|
|
|
$
|
1,548,779
|
|
|
$
|
414,597
|
|
On
March 10, 2016, the Company held a closing of a private placement offering (the “March 2016 Offering”) in which it
sold 494,125 shares of Common Stock at a fixed purchase price of $1.60 per share (the “2016 Offering Price”), for
aggregate gross proceeds of $790,600 (before deducting legal expenses of the March 2016 Offering).
On
April 14, 2016, the Company held closings of a private placement offering (the “April 2016 Offering”) in which the
Company sold 1,741,185 shares of Common Stock at a fixed purchase price of $1.60 per share (the “2016 Offering Price”),
for aggregate gross proceeds of $2,785,896 (before deducting expenses for legal services and agent commissions of the April 2016
Offering).
The
Company sold a total of 2,142,000 shares of its Common Stock at the 2016-2017 Offering Price, with closings in each of November
and December 2016 and January and February 2017, as well as 663,000 shares of Common Stock at the 2017 Offering Price, for aggregate
gross proceeds were $16.7 million before deducting commissions and expenses of approximately $1.3 million.
Stock
incentive plans
2015
Equity Incentive Plan
On
May 22, 2015, the Board of Directors adopted, and on the same date the stockholders approved, the 2015 Equity Incentive Plan (the
“2015 Plan”), which reserved a total of 1,200,000 shares of Common Stock for issuance under the 2015 Plan. The 2015
Plan authorized the grant to participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted
stock units, performance grants. No additional shares will be issued under the 2015 Plan. Effective December 15, 2016, equity
awards are granted under the Company’s 2016 Stock Incentive Plan, which was approved stockholders on the same date.
In
addition, the number of shares of our Common Stock subject to the 2016 Plan, any number of shares subject to any numerical limit
in the 2016 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change
in our outstanding Common Stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization,
reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
Options
granted under the 2015 Plan vest as determined by the Company’s board of directors and expire over varying terms, but not
more than seven years from the date of grant. In the case of an Incentive Stock Option that is granted to a 10% shareholder on
the date of grant, such Option shall not be exercisable after the expiration of five years from the date of grant. Options for
160,000 shares of Common Stock were issued under the 2015 Plan to four non-employee directors in May 2015. No options have
been awarded under the 2016 Plan.
The
fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
Expected
term (years)
|
|
|
6.25
|
|
Risk-free
interest rate
|
|
|
1.29
|
%
|
Volatility
|
|
|
47
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Expected
term: The Company’s expected term is based on the period the options are expected to remain outstanding. The Company estimated
this amount utilizing the “Simplified Method” in that the Company does not have sufficient historical experience to
provide a reasonable basis to estimate an expected term.
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Volatility:
The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s
peer group stock price for a period consistent with the options’ expected term.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring
dividends in the near future.
The
following is a summary of the option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
– July 1, 2015
|
|
|
160,000
|
|
|
$
|
1.50
|
|
Exercisable
– July 1, 2015
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding
– June 30, 2016
|
|
|
160,000
|
|
|
|
1.50
|
|
Exercisable
– June 30, 2016
|
|
|
40,000
|
|
|
|
1.50
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding
– June 30, 2017
|
|
|
160,000
|
|
|
$
|
1.50
|
|
Exercisable
– June 30, 2017
|
|
|
80,000
|
|
|
$
|
1.50
|
|
As
of June 30, 2017, the total intrinsic value of options outstanding and exercisable was $1,158,400 and $579,200, respectively.
As of June 30, 2017, the Company has $52,800 in
unrecognized stock-based compensation expense
attributable to the outstanding options, which will be amortized over a period of 2.14 years.
For
the years ended June 30, 2017 and 2016, the Company recorded $27,932 and $28,008, respectively, in stock-based compensation related
to stock options, which is reflected in the consolidated statements of operations.
Issuance
of restricted shares – employees and consultants
Restricted
stock awards are considered outstanding at the time of execution by the Company and the recipient of a restricted stock agreement,
as the stock award holders are entitled to dividend and voting rights. As of June 30, 2017, the number of shares granted for which
the restrictions have not lapsed was 1,352,265 shares.
The Company recognizes the compensation expense
for all share-based compensation granted based on the grant date fair value for directors and employees and the reporting period
remeasured fair value for consultants. The fair value of the award is recorded as share–based compensation expense over the
respective restriction period. Any portion of the grant awarded to consultants, directors, employees, and other service providers
as to which the repurchase option has not lapsed is accrued on the Balance Sheet as a component of accounts payable and accrued
expenses. As of June 30, 2017 and 2016, the accrued stock-based compensation was $399,157 and $179,079, respectively. The Company
has the right to repurchase some or all of such shares in certain circumstances upon termination of the recipient’s service
with the Company, for up to 60 months from the date of termination (“repurchase option”). The shares as to which the
repurchase option has not lapsed are subject to forfeiture upon termination of consulting and employment relationships.
In
September 2015, the Company amended the original restricted stock agreement for certain award recipients. Pursuant to the amendment,
75% of the shares as to which the repurchase option had not lapsed as of September 30, 2015 will be released from the repurchase
option on the third anniversary of the original effective date of the agreement. The remaining 25% of the shares will be released
from the repurchase option on the fourth anniversary of the original effective date.
The
following is a summary of restricted shares:
Grant
Date
|
|
Shares
Issued
|
|
|
Fair
Value (1)
|
|
|
Shares
Vested
|
|
June
2014
|
|
|
307,876
|
|
|
$
|
1,294,029
|
|
|
|
121,530
|
|
July
2014
|
|
|
32,408
|
|
|
|
48,612
|
|
|
|
23,791
|
|
August
2014
|
|
|
81,020
|
|
|
|
326,323
|
|
|
|
8,102
|
|
September
2014
|
|
|
129,633
|
|
|
|
352,282
|
|
|
|
13,667
|
|
March
2015
|
|
|
72,918
|
|
|
|
401,717
|
|
|
|
—
|
|
October
2015
|
|
|
293,000
|
|
|
|
439,500
|
|
|
|
—
|
|
November
2015
|
|
|
36,200
|
|
|
|
54,300
|
|
|
|
—
|
|
December
2015
|
|
|
300,000
|
|
|
|
1,393,000
|
|
|
|
230,000
|
|
January
2016
|
|
|
40,000
|
|
|
|
68,000
|
|
|
|
—
|
|
March
2016
|
|
|
60,000
|
|
|
|
333,000
|
|
|
|
60,000
|
|
June
2016
|
|
|
118,000
|
|
|
|
535,809
|
|
|
|
—
|
|
August
2016
|
|
|
351,000
|
|
|
|
1,489,247
|
|
|
|
40,000
|
|
January
2017
|
|
|
192,000
|
|
|
|
1,165,122
|
|
|
|
—
|
|
February
2017
|
|
|
110,000
|
|
|
|
697,500
|
|
|
|
—
|
|
March
2017
|
|
|
20,000
|
|
|
|
135,000
|
|
|
|
—
|
|
|
|
|
2,144,055
|
|
|
$
|
8,733,441
|
|
|
|
497,090
|
|
|
(1)
|
–
The fair value of the restricted stock awards as shown above is based on either the balance
sheet date for consultants or grant date for employees.
|
In relation to the above restricted stock agreements
for the year ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense for the shares that have vested
of $3,223,398 and $821,617, respectively.
As
of June 30, 2017, the Company had $3,966,899 in unrecognized stock-based compensation expense related to the unvested shares.
Note
11. Commitments and contingencies
Employment
agreements
On
June 15, 2015, the Company entered into a three-year employment agreement with the Chief Executive Officer (“CEO”).
After the initial three-year term, the agreement will be automatically renewed for successive one-year periods unless terminated
by either party on at least 30 days’ written notice prior to the end of the then-current term. The CEO’s annual base
salary is $150,000 and is subject to increase or decrease on each anniversary as determined by the Board of Directors. The CEO
is eligible, at the discretion of our Board of Directors, to receive an annual cash bonus of up to 100% of his annual base salary,
which may be based on the Company achieving certain operational, financial or other milestones (the “Milestones”)
that may be established by the Board of Directors. The CEO is entitled to receive stock options or other equity incentive awards
under the 2016 Plan as and when determined by the Board, and is entitled to receive perquisites and other fringe benefits that
may be provided to, and is eligible to participate in any other bonus or incentive program established by the Company, for the
executives. The CEO and his dependents are also entitled to participate in any of the employee benefit plans subject to the same
terms and conditions applicable to other employees. The CEO will be entitled to be reimbursed for all reasonable travel, entertainment
and other expenses incurred or paid by him in connection with, or related to, the performance of his duties, responsibilities
or services under his employment agreement, in accordance with policies and procedures, and subject to limitations, adopted by
us from time to time. In the event that the CEO is terminated by the Company without Cause (as defined in his employment agreement)
or he resigns for Good Reason (as defined in his employment agreement) during the term of his employment agreement, the CEO would
be entitled to (x) an amount equal to his annual base salary then in effect (payable in accordance with the Company’s normal
payroll practices) for a period of 24 months commencing on the effective date of his termination (the “Severance Period”)
(in the case of termination by the executive for Good Reason, reduced by any cash remuneration paid to him because of any other
employment or self-employment during the Severance Period), and (y) if and to the extent the Milestones are achieved for the annual
bonus for the year in which the Severance Period commences (or, in the absence of Milestones, the Board of Directors has, in its
sole discretion, otherwise determined an amount of the CEO’s annual bonus for such year), an amount equal to such annual
bonus pro-rated for the portion of the performance year completed before the CEO employment terminated, (z) any unvested stock
options, restricted stock or similar incentive equity instruments will vest immediately. For the duration of the Severance Period,
the CEO will also be eligible to participate in our benefit plans or programs, provided the CEO was participating in such plan
or program immediately prior to the date of employment termination, to the extent permitted under the terms of such plan or program
(collectively, the “Termination Benefits”). If the CEO’s employment is terminated during the term of his employment
agreement by the Company for Cause, by the CEO for any reason other than Good Reason or due to his death, then he will not be
entitled to receive the Termination Benefits, and shall only be entitled to the compensation and benefits which shall have accrued
as of the date of such termination (other than with respect to certain benefits that may be available to the CEO as a result of
a Permanent Disability (as defined in his employment agreement).
On
June 15, 2015, the Company also entered into two-year employment agreements with each of the Vice President of Business Development,
the Vice President of Operations, and the then Chief Financial Officer. Each of these employment agreements had substantially
the same terms as that of the CEO described above. These employment agreements expired on June 15, 2017.
On
July 14, 2017, the Board named a new Chief Financial Officer who would also serve as the Company’s Chief Accounting Officer,
effective as of the same date.
In
connection with the election of the new Chief Financial Officer of the Company, the Company entered into a one-year employment
agreement, dated July 14, 2017 (the “Employment Agreement”), with the Chief Financial Officer with essentially the
same terms as the Chief Executive Officer employment agreement described above with the exception of the following:
|
-
|
Monthly
living expenses of $1,600.
|
|
-
|
Target
annual bonus each fiscal year equal to 70% of his annual base salary, based on certain
Company operation, financial, and other milestones set by the Board and/or its Compensation
Committee.
|
|
-
|
A
restricted a stock award for 100,000 shares of Common Stock and options for 75,000 shares
of Common Stock to be granted during the Company’s next open trading window. The
Awards will be granted under the 2016 Plan and will vest 25% on each of the first, second,
third, and fourth anniversaries of the grant date, subject to the CFO’s continued
employment and the terms and conditions of the 2016 Plan and the applicable award agreements.
|
The
term of the Employment Agreement extends through July 31, 2018, and the Employment Agreement will automatically renew for successive
one- year periods unless either party gives at least 30 days written notice of non-renewal to the other party prior to the end
of the then applicable term.
Operating
leases
The
Company leases office space in Huntersville, NC pursuant to a three-year lease agreement. The operating lease provides for annual
real estate tax and cost of living increases and contains predetermined increases in the rentals payable during the term of the
lease. The aggregate rent expense is recognized on a straight-line basis over the lease term. The total lease rental expense was
$56,808 and $55,186 for the years ended June 30, 2017 and 2016, respectively. The future minimum payments under this lease
are $40,314.
The
Company leases equipment for its Canandaigua, NY facility pursuant to a three-month lease agreement beginning on June 16, 2017.
The aggregate rent expense is recognized on a straight-line basis over the lease term. The total lease rental expense was $8,125
and $0 for the years ended June 30, 2017 and 2016, respectively. The future minimum payments under this lease are $44,375.
The Company anticipates renewing the lease for another three months and in process of finalizing terms and conditions.
Real
Estate Contingent Liability
In
connection with the acquisition of the STC-MEMS Business, the Company agreed to pay to Fuller Road Management Corporation a penalty,
as set forth below, if the Company sells the property subject to the related Definitive Real Property Purchase Agreement within
three (3) years after the date of such agreement for an amount in excess of $1,750,000, subject to certain enumerated exceptions.
The penalty imposed shall be equivalent to the amount that the sales price of the property exceeds $1,750,000 up to the maximum
penalty (“Maximum Penalty”) defined below:
|
|
|
Maximum Penalty
|
|
Year 1
|
|
|
$
|
5,960,000
|
|
Year 2
|
|
|
$
|
3,973,333
|
|
Year 3
|
|
|
$
|
1,986,667
|
|
The
fair value of the contingent liability was calculated by an independent third-party appraisal firm, utilizing a present
value calculation based on the probability the Company sells the property triggering the contingent penalty and a discount
rate of 14.1%. The 14.1% discount rate was derived from a weighted average cost of capital, modified to include the
effects of the bargain purchase price. As of June 30, 2017, the balance of the contingent liability was $1,730,542.
Note
12. Related Party Transactions
Consulting
Services
AEG
Consulting, a firm owned by one of the Company’s Co-Chairmen, received $15,195 and $10,238 for consulting fees for the years
ended June 30, 2017 and 2016, respectively.
The
Company’s CEO and Vice President of Engineering participated in the closing of the 2016-2017 Offering that occurred on November
25, 2016 where they each purchased 20,000 shares of Common Stock at a price of $5.00 per share. The Company’s Vice-President
of Operations also purchased 2,000 shares of Common Stock in the closing at an aggregate purchase price of $10,000. One of the
Co-Chairmen of the Company’s Board purchased 200,000 shares of Common Stock at a price of $5.00 per share at an aggregate
purchase price of $1,000,000. The brother of the CEO purchased 14,000 shares of Common Stock in the closing at an aggregate purchase
price of $70,000.
The
Company’s second Co-Chairman participated in the closing of the 2016-2017 Offering that occurred on December 27, 2016 where
he purchased 2,000 shares of Common Stock at a price of $5.00 per share for an aggregate purchase price of $10,000. A second brother
of the CEO purchased 20,000 shares of Common Stock in the closing at an aggregate purchase price of $100,000.
Inventory
Purchase
In
March 2016, the Company purchased inventory from Big Red LLC (“Big Red”), a company formed by the CEO, the brother
of the Company’s CEO, the Vice President of Operations and one additional party. The transaction for $43,544 was executed
so the Company could pursue commercialization of the amplifier inventory purchased. The Company will utilize this inventory and
related technology to process and sell the amplifiers. The CEO and Vice President of Operations assigned their interests in Big
Red to other parties in March of 2016.
License
Agreement
In
April 2016, the Company entered into a license agreement with Big Red. The license agreement was executed so that the Company
could pursue commercialization of amplifier inventory purchased from Big Red in March 2016. The Company will utilize this inventory
and related technology to process and sell the amplifiers. Future revenue from sales utilizing the amplifier technology will result
in a license fee paid to Big Red according to the following schedule:
Net
Sales
|
|
Royalty
Percentage
|
|
$0
- $500,000
|
|
|
5.00
|
%
|
$500,000
- $1,000,000
|
|
|
4.00
|
%
|
$1,000,000
- $2,000,000
|
|
|
3.50
|
%
|
$2,000,000
– $5,000,000
|
|
|
3.00
|
%
|
$5,000,001
and over
|
|
|
2.00
|
%
|
Note
13. Income Taxes
The
Company had no income tax expense due to operating losses incurred for the years ended June 30, 2017 and 2016.
The
provision for/(benefit from) income tax differs from the amount computed by applying the statutory federal income tax rate to
income before the provision for/(benefit from) income taxes. The sources and tax effects of the differences are as follows:
|
|
For
the
Year Ended
June
30,
2017
|
|
|
For
the
Year Ended
June 30,
2016
|
|
Income
taxes at Federal statutory rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
State
income taxes, net of Federal income tax benefit
|
|
|
(2.63
|
)%
|
|
|
(2.60
|
)%
|
Permanent
differences
|
|
|
(6.36
|
)%
|
|
|
0.22
|
%
|
Other
|
|
|
6.49
|
%
|
|
|
—
|
|
Change
in Valuation Allowance
|
|
|
36.50
|
%
|
|
|
36.09
|
%
|
State
tax rate change
|
|
|
0.00
|
%
|
|
|
0.29
|
%
|
Income
Tax Provision
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities are as follows:
|
|
June
30, 2017
|
|
|
June
30, 2016
|
|
Net
Operating Loss Carryforwards
|
|
$
|
5,352,238
|
|
|
$
|
1,711,488
|
|
Share-based
compensation
|
|
|
406,498
|
|
|
|
396,264
|
|
Derivative liability
|
|
|
—
|
|
|
|
315,205
|
|
Other
|
|
|
(33,028
|
)
|
|
|
(22,365
|
)
|
|
|
|
5,725,708
|
|
|
|
2,400,592
|
|
Valuation
Allowance
|
|
|
(5,725,708
|
)
|
|
|
(2,400,592
|
)
|
Net
Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
At
June 30, 2017, the Company had approximately $14,600,000 of Federal and state NOL carryovers that may be available to offset future
taxable income.
The
NOL carry overs, if not utilized, will expire in stages beginning 2035.
Based
on a history of cumulative losses at the Company and the results of operations for the years ended June 30, 2017 and 2016, the
Company determined that it is more likely than not it will not realize benefits from the deferred tax assets. The Company will
not record income tax benefits in the financial statements until it is determined that it is more likely than not that the Company
will generate sufficient taxable income to realize the deferred income tax assets. As a result of the analysis, the Company determined
that a full valuation allowance against the deferred tax assets is required. The net change in the valuation allowance during
the year ended June 30, 2017 was an increase of approximately $3,325,000.
As a result of the reverse merger that occurred on May 22, 2015, the Company’s previous NOL may
be significantly limited. The Company has not performed a detailed analysis to determine whether an ownership change under IRC
Section 382 or similar rules has occurred. The effect of an ownership change would be the imposition of annual limitation on the
use of NOL carryforwards attributable to periods before the change which total approximately $421,000. Any limitation may result
in expiration of a portion of the NOL before utilization. The Company recognizes interest and penalties related to uncertain tax
positions in selling, general and administrative expenses. The Company has not identified any uncertain tax positions requiring
a reserve as of June 30, 2017.
Note
14. Subsequent Events
In July 2017, 9,533 placement agent warrants
issued in connection with the 2016-2017 private placement offering, each having a term of five years and an exercise price of $5.00,
were exercised.